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The Fundamentals Suck, But The Consumer is in Great Shape, Right?

An Excerpt from our January 2020 Forecast Report:

According to our research service, Hedgeye:

  • 24 of the S&P 500 companies have reported an aggregate year-over-year profit recession of -4.8%.

  • That’s a rate of change slowdown from last quarter’s -1.1% year-over-year decline.

  • Profits remaining negative year-over-year are the #1 catalyst for US Jobless Claims to accelerate.

If these reported earnings numbers are any indication of what earnings will look like as more companies report, well, that could be a problem... Think about the relationship between company profits, jobs, and consumer spending. Listen, S&P 500 companies do not operate as socially responsible enterprises, taking into consideration how layoffs affect the economy. They look at their profitability, and if that is falling, well, it’s time to shift labor expenses accordingly.

The recent increase in jobless claims is something not many are paying attention to (+943 bps to 5.93% on US Initial Jobless Claims Year over Year). This is a huge data point. It looks like max employment for this cycle is in the rearview mirror.

History has shown us that inflection points occur when stock market prices de-couple from economic fundamentals. This similarly happened in 1929 and is happening now. Poor fundamental data is pointing to slowing growth. Look at the data coming out of the US below (right side of the chart). That’s a lot of red!